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Inheritance is taxing: China’s family businesses threatened

East Asia Forum - 2 hours 48 sec ago

Author: Peter Cai, Business Spectator

China is facing a new economic crisis, and it is not about mounting local debt or even a rapidly slowing property market. The crisis in the making is about family business succession in the world’s second-largest economy. This issue may seem innocuous for many observers, but it is in fact one of the many pressing issues for the country’s economy, which is undergoing a painful process of rebalancing. Why is the family succession issue so important?

We have to start by debunking one of the most enduring misunderstandings about the Chinese economy. Many people think the Chinese economy is dominated by state-owned enterprises, but this could not be further from truth. Nicholas Lardy, a leading China economist and senior fellow at the Washington think tank, the Peterson Institute for International Economics, estimates private enterprises in China account for two-thirds of total output in China. Chinese official statistics tell a similar story. In manufacturing, which represents about 41 per cent of GDP, state-owned enterprises only account for 20 per cent of output. The overwhelming majority of China’s private enterprises are family owned.

These privately-owned family businesses are facing succession issues roughly at the same time — an unprecedented phenomenon in the world of family business. Those brave entrepreneurs who embraced the market when China abandoned the Maoist ideological craze in favour of market reform are fast approaching retirement age. According to a white paper released by Fortune Generation, Chinese family business faces a looming succession crisis in five to 10 years’ time.

The succession crisis is happening at a time when China’s privately controlled manufacturing sector is under unprecedented pressure to move away from its labour intensive production model, which is unsustainable in light of soaring wage increases. Mao Li Xiang, the chairman of Fotile Group, the country’s leading producer of kitchen appliances, warns that the succession crisis has the potential to be more destructive than the global financial crisis. Fortune Generation’s white paper estimates that only 8 per cent of family companies have successfully managed to pass on the baton to the next generation.

Family succession is not an easy issue to deal with anywhere in the world, and the problem is particularly acute in China. Cultural differences between first generation entrepreneurs and their children could not be greater. Nearly all of China’s elder business people grew up during the depravity of Maoist China, when there was a shortage of everything. Many endured starvation and years of languishing in the countryside for so-called ‘re-education’. Many of these early entrepreneurs didn’t have much formal education. Their successes have relied on their drive, instincts and entrepreneurship.

But, in sharp contrast, 88 per cent of their children have university degrees and 52 per cent of them have studied overseas, including at many leading institutions such as Harvard, Wharton and the London School of Economics.

Anecdotally, members of the overseas-educated second generation often clash with their parents over the management of their companies. The children are keen to introduce advanced Western management systems to their family businesses. But the children’s push to modernise these businesses is often viewed with suspicion, as the parents believe many Western practices are incompatible with the reality of doing business in China.

The first generation entrepreneurs also operate under a very different value system from their children, who have grown up only knowing affluence. Many Western-educated second generation children also don’t like dealing with government officials, a necessary evil in the Chinese business world. Kelly Zong, the only child and heiress to the multi-billion-dollar Wahaha fortune, recently publicly criticised China’s social ills. ‘I think we lost our soul. In the US, they have beliefs: Christianity and Catholicism. China has Buddhism, but I don’t think people really believe it in their heart’, she told The Guardian. Two days after the interview, her father Zong Qinghou, one of China’s most powerful tycoons, rebuked his daughter in the Chinese media saying she was influenced by foreign culture when young, and was not clear about the present situation in China.

The transition is particularly evident in the manufacturing industry; many children who are educated abroad shun the manufacturing sector and prefer to seek opportunities in finance and other ‘cool’ areas. Fortune Generation estimates more than 65 per cent of children whose parents own manufacturing businesses don’t want to be involved in the industry.

This could potentially evolve into a large problem, with economy-wide significance, if China’s family-dominated manufacturing sector fails to find enough successors to carry on the businesses. However, it is not all doom and gloom, and there are examples where second generation business people have risen to the occasion, taking on the challenge of running a family business.

One such person is Australian-educated Chen Danxia, who is expected to lead the Guangzhou-based Liby Group, the market leader in selling consumer goods such as cleaning agents and personal care products. She has successfully managed to acquire and rejuvenate an ailing cosmetic brand in Shanghai, adding it to the family fortune. The heiress also took advantage of the global financial crisis to acquire Western brands, including those from Australia.

Nevertheless, the family succession issue is shaping up to be a major economic challenge for China as the country seeks to transform its manufacturing-based industry and redefine the relationship between the state and the private sector.

Peter Cai is an Australian journalist and a former Commonwealth Treasury policy analyst. The views in this article are his own and not those of his current or former employers.

This article was originally published here on ‘Business Spectator’.

Categories: Forum

State-owned enterprises finding bigger role in global investment

East Asia Forum - Wed, 11/26/2014 - 16:00

Author: Michael V. Gestrin, OECD

State-owned enterprises have played a relatively minor role in the era of investment-driven globalisation that began in the 1970s. As recently as 2007, when annual flows of foreign direct investment by multinational enterprises reached a record US$2 trillion, state-owned enterprises were sitting on the sidelines, accounting for only 3–4 per cent of international mergers and acquisitions, the main vehicles multinational enterprises use to acquire and control international operations.

This situation began to change with the onset of the global financial crisis in 2008. By 2009 state-owned enterprises had come to account for one fifth of international mergers and acquisitions. For some countries, especially among the resource-rich emerging economies, state-owned enterprises represent their main source of international capital.

There are reasons to believe that the emergence of state-owned enterprises as important sources of international investment might not be a transient phenomenon.

First among them is China. The combination of a sizeable state-owned enterprise sector in the domestic economy combined with the government’s policy of encouraging outward investment has seen the country make the transition from being mainly a capital importer to being one of the world’s leading sources of foreign direct investment. And China is not the only source of international investment by state-owned (or controlled) enterprises. Emerging markets in the Middle East and Southeast Asia, as well as resource-rich industrialised countries such as Norway, have also become increasingly active international investors.

The emergence of multinational state-owned enterprises has become a cause for concern among governments. These concerns include potential threats to national security, the loss of control over natural resources and the possibility that state- owned enterprises enjoy advantages, such as preferential access to finance, which will give them an unfair competitive advantage against their private-sector counterparts.

In addition to these national-level concerns, international investments by state-owned enterprises give rise to a number of potential problems of a more multilateral nature.

At the top of the list there is the question of the long-term competitive viability of state-owned enterprises as international investors. One persistent theme in international business literature has been the ‘liability of foreignness’ and the challenges faced by a multinational enterprise. This literature is rife with examples of spectacular business failures, usually involving overly ambitious expansion plans, including those of experienced multinational enterprises.

The rapid rise of state-owned enterprises as international investors is probably not due to a sudden surge in these firms’ strategic agility and competitiveness. Rather, a combination of macroeconomic and policy factors has been pushing them to expand outside their domestic markets. This has especially been the case for Chinese state-owned firms. It therefore seems possible that the surge in international investment by SOEs represents an outward foreign direct investment bubble, driven in particular by China’s energetic pro-outward- investment policies and fuelled by the country’s foreign exchange reserves.

The collapse of the bubble, if indeed it exists, would significantly disrupt the global value chains into which state-owned multinational enterprises have integrated themselves. It would also affect the countries for which these enterprises have become major sources of capital (especially the resource-rich developing economies) and the home countries of SOEs that have squandered resources in support of overly ambitious international expansion strategies. In addition, governments that have used state-owned enterprises to secure access to resources they view as essential to their long-term national interest could find that their ability to acquire certain intermediate inputs is disrupted.

These are mostly potential rather than actual concerns. It is not difficult to find individual examples of all of these problems, but for the time being there is no clear evidence of a systemic state-owned investment problem.

Nonetheless, governments have started to respond, although so far this response has been modest. At the national level a few countries (for example, Australia and Canada) have reviewed and clarified their review processes for investments by foreign state-owned enterprises. Internationally, bilateral investment treaties increasingly stipulate that investments by SOEs are covered. In addition, although it is too early in the negotiations to tell, the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership could eventually include provisions in support of competitive neutrality.

On the one hand, this limited policy response reflects the fact that, at a time when global investment flows remain 40 per cent below their pre-financial crisis levels, governments don’t want to discourage any source of international investment. On the other hand, it probably also reflects the serious challenges involved in breaking new ground in international investment rule-making at a time when many features of the existing global investment regime are being challenged, including investor-state dispute settlement and the growing complexity of a system made up of thousands of different bilateral and regional investment agreements.

Unfortunately, the lack of any clear initiative at the international or multilateral levels (such as was done to address concerns over investments by sovereign wealth funds in the Santiago Principles in 2009) holds the danger that governments will increasingly develop policy responses at the national level where the scope for opacity, political capture and ultimately protectionism is greatest.

As new actors in globalisation, state-owned enterprises reflect only one of the ways in which the nature of international investment and the structures of multinational enterprises continue to evolve. They can also be seen as an example of how the realities of globalisation are leaving the global investment policy regime behind. Just as laws and regulations support well-functioning markets at the domestic level by ensuring fair competition, encouraging innovation and supporting responsible business conduct, the same logic holds at the international level.

If nothing else, the rapid growth of international investments by state-owned enterprises and the policy concerns that these are raising have highlighted the need to develop new multilateral options to help governments deal with the policy challenges of multilateral investment.

Michael V. Gestrin is a senior economist in the Investment Division at the OECD.

The views expressed in this article should not be reported as representing the official views of the OECD or of its member countries. The opinions expressed and arguments are those of the author.

 This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘The state and economic enterprise.

 

 

 

Categories: Forum

Japan’s snap election won’t ease Abe’s woes

East Asia Forum - Wed, 11/26/2014 - 04:00

Author: Corey Wallace, ANU

When Abe dissolved the lower house on 21 November 2014 and called a snap election for December, top leaders in the Liberal Democratic Party (LDP) and New Komeito identified keeping 270 seats as the low-water mark, which would represent a loss of 56 seats. Given current economic conditions and the state of public opinion, a unified and confident opposition would probably extract such losses and would challenge the LDP–New Komeito coalition’s majority. But the opposition is still struggling to unify, so Abe and the coalition look reasonably safe.

A possibly more decisive unknown electoral variable is not what the opposition parties will do, but what New Komeito voters will do. Under the Japanese lower house’s mixed system of single-member districts (SMDs) and a proportional list, the LDP and New Komeito have often negotiated to not run candidates against each other in some of the SMDs. But there is very strong opposition to many of Abe’s policies among the New Komeito base and it is unclear if these voters will be able to hold their noses and vote for LDP candidates in the single member districts as part of the traditional LDP–New Komeito quid pro quo.

Despite Abe publicly contemplating the possible loss of a coalition majority, this outcome is unlikely. In fact, given the state of the opposition, it is by no means impossible that the coalition will increase the number of lower house seats it has. The conventional thinking is that Abe going to the polls and surviving with a solid majority intact will consolidate his position within the LDP. It will give Abe two more years to implement his difficult policy agenda and the third arrow of Abenomics.

Holding an election will also allow Abe to inaugurate a new cabinet without having to publicly admit that he chose badly in the September reshuffle. The election should also put to rest the pursuit of the money and politics scandals through what analyst Jun Okumura calls misogi or ‘cleansing’. If Abe is skilful, he might be able to remove potential troublemakers in the cabinet such as Shigeru Ishiba and Taro Aso. If he is lucky, some of his critics who are in favour of fiscal austerity might fare badly in their SMDs and not make it back into parliament.

But unless Abe and the coalition win big, two major factors will complicate the implementation of Abe’s policy agenda post-election.

First, all of the major institutional and political veto points will still remain after the election. New Komeito will still be in the coalition and may even be in a stronger position post-election. The dissolution of Your Party, the weakening of the Japan Innovation Party, and the likely end of Shintaro Ishihara’s Next Generation Party mean fewer options for Abe to cudgel New Komeito into submission by threatening to break up the coalition in favour of a more conservative partner. And if the coalition does approach the 270 seat low-water mark, it will effectively make New Komeito the casting vote in both the lower and upper houses. Losses of this magnitude are not likely to be good news for the Trans-Pacific Partnership (TPP) or agricultural reform.

The LDP is unlikely to lose its rural SMD seats, but it is quite likely that the LDP will lose a significant number of urban SMD seats. In such a case, the more seats the LDP loses, the more power LDP parliamentarians from rural SMDs will have to undermine the reform agenda. This will make it even more likely that Abe will have to engage in a public showdown with these entrenched interests to implement his agenda — something which Abe has steadfastly avoided so far. As noted by Tobias Harris, bureaucratic resistance to the monetary and fiscal policies of Abenomics will also remain in place. Unless current economic trends are reversed, fiscal hawks in the Ministry of Finance and the LDP will be well positioned to challenge Abe’s management of the economy and government finances.

Second, while the Japanese public is not likely to repudiate Abe at this point in time, it is unlikely that Abe’s esteem among the public will be improved by going through an election. There has already been significant criticism of the transparently self-serving reasons that Abe called the election. The public does not buy Abe’s excuse of needing to go to the people to get a mandate for delaying the consumption tax for 18 months.

Despite wanting to make the election about Abenomics, Abe will be criticised over a wide variety of issues and he may look increasingly less in control. Due to the absence of a coherent alternative to LDP rule, the opposition attacks will likely not benefit themselves all that much electorally. But nothing short of improved economic news and signs that Abenomics is reviving real wages for the general public will improve Abe’s falling approval ratings.

During the critical first half of the year subsequent to the election, controversial issues that have already been put off will resurface. These include the security legislation connected to collective self-defence, base relocation issues brought up by the recent Okinawa elections, and the TPP and structural reforms. Abe might find that the nine months until the LDP election for the party president is a very long time indeed.

Corey Wallace is a visiting fellow at the Australia–Japan Research Centre at the Crawford School of Public Policy, ANU.

Categories: Forum

Sri Lanka tilts to Beijing

East Asia Forum - Tue, 11/25/2014 - 16:00

Author: David Brewster, ANU

A sea change is occurring in Sri Lanka’s strategic orientation. Recent developments suggest that Sri Lanka is becoming China’s new best friend and security partner in the eastern Indian Ocean. This would represent a major change in Sri Lanka’s foreign policy and could have significant consequences for regional security.

The immediate cause célèbre is the visit of a Chinese submarine and announcement of a new Chinese-built port in Colombo in September, followed by another visit in early November. A third is rumoured for later this month. These are no ordinary naval visits: their nature, frequency and timing are extraordinary. The first occurred during state visits by Japanese Prime Minister Abe and Chinese President Xi Jinping. Claims by Beijing that its nuclear-powered attack submarine is on deployment against Somali pirates are risible. Despite Colombo’s initial attempts at secrecy, the visits seem to be a deliberate signal by China that it intends to maintain a submarine presence in the Indian Ocean and that Sri Lanka will play an important role that strategy.

Sri Lanka has a longstanding policy of showing accommodation and reassurance towards India. In particular, Sri Lanka will not allow itself to be used by other powers to threaten India’s security interests. This policy has been followed more or less since independence. It was reflected in a 1987 agreement under which Sri Lanka committed not to allow any of its ports to be used by any country for military purposes in a manner prejudicial to India’s interests. Overall the strategy has served Sri Lanka well in dealing with its huge and sometimes difficult neighbour.

This stance has only really been called into question once, with disastrous results for Sri Lanka. During the 1980s, in the early days of the Tamil civil war, Colombo toyed with offers of foreign military assistance that some feared would lead to the establishment of a US naval base at the northern port of Trincomalee. These concerns were a significant factor in India’s decision to provide support for the Tamil insurgency and India’s subsequent military intervention in Sri Lanka.

What has caused a change in Sri Lanka’s stance? In recent years there has been significant Chinese investment in high profile infrastructure in the country. The Chinese presence in Colombo is palpable. Some of these projects, such as a new port at Hambantota in southern Sri Lanka, have led to claims that China seeks to build a string of naval bases across the northern Indian Ocean. It seems unlikely that Hambantota will become a formal Chinese naval base, but there is little doubt that the Chinese navy will be seeking dependable access to replenishment facilities in the region.

There have been increasing indications over the last six months of Sri Lanka’s willingness to host Chinese military-related facilities. It was recently revealed that China will take over management of a new and enlarged Phase II Hambantota port with berths dedicated for Chinese use. In July the government also revealed it intended to establish a Chinese-run aircraft maintenance facility near Trincomalee, ostensibly to support Sri Lanka’s air force. After strong protests from Delhi, the government may establish this facility in another location, perhaps next to Hambantota port. If nothing else, this is a reminder that the both the Chinese navy and air force will be new players in the Indian Ocean.

The timing of these developments is odd. Beijing is currently promoting what it calls the ‘Maritime Silk Road’ that would involve the construction of ports and other infrastructure across the Indian Ocean. This would include a string of dedicated component manufacturing facilities that would feed back to assembly in China — perhaps something akin to Japan’s ‘flying geese’ strategy in the 1970s. Sri Lanka has volunteered itself as China’s prime partner in this initiative. Yet both vociferously claim that the strategy has no military implications. The recent security developments seriously undermine these claims.

China may be simply seizing an opportunity. Despite some of the hype, China actually has few ‘friends’ in the Indian Ocean that could be depended upon to host military-related facilities. Pakistan is of course a long-standing ally, but its stability and dependability is looking increasingly questionable. Indeed, Xi recently cancelled a planned trip to Islamabad over security concerns. Many have also tagged Myanmar as a de facto ally of China. But Myanmar has never allowed China to use its military facilities, and its political dependability to China is also increasingly uncertain. Sri Lanka, with a stable and cooperative authoritarian regime strategically located in the central Indian Ocean, ticks many of China’s strategic boxes.

How will India respond to these developments? Delhi has expressed anger at these visits in the strongest terms and has told the Rajapaska government that they are ‘unacceptable to India’. But despite strong trade and defence links, including considerable training for Sri Lanka’s military, India’s options are relatively limited. Attempts to isolate the Rajapaksa government are unlikely to be considered an option: Delhi believes attempts to isolate Myanmar’s military regime after 1988 were a major strategic mistake that drove the regime closer to Beijing for decades. Delhi may try to reverse Colombo’s current path through a combination of engagement and coercion, although it is not clear what leverage it has. But decision-makers in Colombo will (or should) be acutely aware of Delhi’s actions in the 1980s when it perceived Sri Lanka may be used by other powers as a threat to India.

David Brewster is Visiting Fellow at the Strategic and Defence Studies Centre, the Australian National University.

Categories: Forum

China’s aspiring global leadership

East Asia Forum - Tue, 11/25/2014 - 04:00

Author: Thitinan Pongsudhirak, Chulalongkorn University

This geopolitical summit season has consolidated ongoing trends in international affairs. A still-rising China with global leadership aspirations, a resurgent Russia bent on restoring its superpower status, and sclerosis and dysfunction in Western countries is likely to dominate international politics for at least the next 20 years. In fact, we might only be at the beginning in this long time span where seismic global power shifts are taking place.

The challenge for countries around the Asia Pacific is what to do and how to respond. To promote regional peace and stability, China’s global leadership requires measured accommodation, enough to satisfy Beijing’s rightful place in the global order but not so much as to lead the Chinese leadership into an outright expansionist agenda.
Over the past two weeks, during the APEC summit in Beijing, the ASEAN and East Asia Summit in Naypyidaw, and the G20 leaders’ meeting in Brisbane, the patterns were clear. Everywhere Chinese leaders went, they were pestered with questions about China’s aggressive intentions in the East China Sea with respect to Japan and the South China Sea involving ASEAN member states, particularly the Philippines and Vietnam.

Similarly, Russian President Vladimir Putin was greeted with criticism and questions about Russia’s interventionist aims in Ukraine after it annexed Crimea in March. Whereas Putin tended to be prickly and defiant in response, Chinese President Xi Jinping and Premier Li Keqiang were deft and sophisticated. In place of rhetoric, China has been following up its geopolitical posturing with action plans and key deliverables.

For the East Asian region broadly, the Chinese have proposed a ‘one belt, one road’ regional development outlook, underpinned by the China-sponsored Maritime Silk Road and the Asian Infrastructure Investment Bank (AIIB). While the idea of using massive Asian foreign exchange reserves to finance Asian development is not new, Beijing has stepped up by providing US$50 billion to capitalise the AIIB, and this will be complemented by other signatories. Already 20 countries in Asia have signed up and more are likely to do so in the future.

The maritime beltway across East Asia is also financially backed by Beijing to the tune of US$40 billion. Coming soon after China’s instrumental role in setting up a BRICS bank — known as the New Development Bank, with an initial capital of US$50 billion, and involving Brazil, Russia, India, China, and South Africa — the Silk Road fund and the AIIB would be a game changer for regional development in East Asia. These schemes would also likely elevate China into a top role in the neighbourhood.

Understandably, the United States and Japan have opposed Chinese funding manoeuvres for fear of losing out to Beijing. The roles of the International Monetary Fund, the World Bank, and even the Asian Development Bank may be consequently eclipsed. But here, Chinese global leadership was further on display in recent top-level meetings.

To indicate goodwill and bilateral cooperation, Mr Xi signed a crucial climate change agreement with President Barack Obama. To assuage concerns about the growing rivalry between two regional free trade schemes, the US-peddled Trans-Pacific Partnership and the China-preferred Regional Comprehensive Economic Partnership, Beijing has provided a big boost to open regionalism and freer trade by proposing a Free Trade Area for the Asia-Pacific (FTAAP), previously an on-again, off-again regional trade configuration.

In fact, the FTAAP can be seen as Xi’s concession to the US. Instead of a competition between TPP and RCEP, China may have enabled both to be enmeshed in the FTAAP. And despite media images to the contrary, Xi and Japanese Prime Minister Shinzo Abe had productive meetings during this most recent summit season.

In the ASEAN realm, Beijing has not committed to the full formulation and implementation of the Code of Conduct in the South China Sea (CoC). But it also has not aggravated the outstanding territorial disputes between China on the one hand and the Philippines and Vietnam on the other. Instead, Chinese leaders kept saying that they viewed the South China Sea as stable and reiterated their intent to remain peacefully engaged in the area. It was a foot-dragging manoeuvre but it did not rule out the completion of the CoC in the future. The AIIB and the Silk Road fund are the sweeteners in exchange for the drawn-out and delayed CoC negotiations.

Along the way, China separately struck bilateral free trade agreements with Australia and South Korea. Both are treaty allies of the United States, and Washington did not object to either trade agreement.

The Chinese leaders just about covered all bases. They had something for everyone and showed no belligerence and bluster, as was sometimes the case in the past. This is not just a global charm offensive but a full-blown global leadership quest. As a rising superpower, China wants to act like a genuine leader, shouldering global burdens and responsibilities.

China’s leadership aspirations coincide with a time when US pre-eminence appears to be fraying around the edges. After his Democratic Party’s recent losses in midterm elections, US President Obama risks being a lame duck. His much touted global ‘pivot’ or ‘rebalance’ towards Asia now does not carry as much credibility as a few years ago when it was launched. Obama wanted to be a Pacific president but circumstances beyond his control at home, in eastern Europe and the Middle East have effectively denied his lofty goal. He has been generally well liked in Asia but Asians are not oblivious to emerging realities in their immediate landscape.

Simply put, the penultimate question for East Asia is: who leads? China might play more by the rules if Beijing is recognised and regarded as a full-fledged major global leader — certainly not the only one but perhaps eventually first among the two equals because of its location. This is not a time for alarming accommodation or dangerous appeasement. But the time has come for more give and take, for China to continue to show leadership capacity in return for greater global recognition.

Thitinan Pongsudhirak is associate professor and director of the Institute of Security and International Studies, Faculty of Political Science, Chulalongkorn University. This article was earlier published in the Bangkok Post.

Categories: Forum

Japan’s unnecessary election

East Asia Forum - Mon, 11/24/2014 - 16:00

Author: Aurelia George Mulgan, UNSW Canberra

Prime Minister Abe is subjecting his ruling coalition — and his nation — to an unnecessary election on 14 December 2014. Abe claims his decision is all about policy, but in reality it is all about politics. His stated rationale for calling the election is the need to secure voters’ endorsement of his administration’s decision to postpone the consumption tax rise to 10 per cent until April 2017. But his real reasons are based on cold calculations of political self-interest.

First and foremost, Abe is hoping to extend his term of office to six years. This has always been his goal, and he is prepared to lose some Lower House seats in order to achieve it. He judges that six years is what he needs to implement his policy agenda. His list includes consolidating policy changes in Japanese defence and security, as well as attempting more difficult changes such as constitutional reform — his principal ideological goal.

Also on the list is reviving the economy, which he understands is the key to his popularity. Abenomics has had mixed short-term success, and Abe realises that the economy is not going to turn around any time soon. This will undermine his administration going into a 2016 election.

Abenomics has not lived up to the marketing hype with which it was sold to the Japanese public. Part of the reason lies in the incomplete and watered-down implementation of the third arrow — structural reform to promote economic growth — which has largely been a flop. Abe’s growth strategy has amounted to lists of long-term policy goals. These have been long on slogans and short on implementation in the face of opposition from vested interests.

Another reason lies in the implementation of the unnamed ‘fourth arrow’ — fiscal reconstruction (code for increasing the consumption tax). This anti-growth component of Abenomics burdens it with mutually contradictory economic programs. Tax increases run directly counter to the fiscal stimulus arrow. The most Abe can claim is his three arrows are ‘on the way to achieving results’ and ‘a virtuous cycle in the economy where company revenue increases, employment expands, wages increase, consumption expands and the economic recovery is just about to be born’, as he said on the early evening TV show NHK News 7. In short, the much-touted economic recovery that was the promise of Abenomics is still just around the corner.

Second, Abe needs to arrest the decline in public support for his cabinet. Unchecked, this would have fuelled unrest in the Liberal Democratic Party (LDP) and possibly undermined his leadership of the party as well as of the administration. If the electorate did not remove him in the 2016 election, then his party might well have. The polls were showing the trend faced by all Japanese governments after a certain period of time — either shorter or longer — down.

A third and related political motivation is Abe’s aim to reshuffle his cabinet; drawing a line under scandals of money politics among the government ministers he appointed. Abe could hardly do this now after having only done so two months earlier in September. It would mean a reshuffle of a reshuffle. The parallels with his 2006–07 cabinet were particularly unfavourable given that they led to his resignation as prime minister at the time. In the current cabinet, the resignation domino threatens to start all over again. By going to an election, Abe can let the voters do his dirty work for him — getting rid of suspect figures such as Minister of Agriculture, Forestry and Fisheries Koya Nishikawa, who is most likely to lose his seat, along with former Minister of Economy, Trade and Industry, Yuko Obuchi, who has already resigned from the LDP.

Finally, Abe figures that he can use the tax hike postponement to his political advantage. He can go into the election on the premise of not raising the consumption tax, which he knows is supported by a majority of voters. No opposition party is against the postponement, and this prevents his opponents from using the tax issue to gain electoral traction against the ruling coalition. This is all part of a general strategy to catch the opposition parties on the hop. The Democratic Party of Japan is nowhere near restoring its major party status and will be incapable of making the seat gains necessary to put it back in office.

At present, politicians in the opposition parties are re-sorting themselves via switches in party membership and new electoral alliances, but these will be insufficient to present voters with the prospect of a viable alternative government. According to master electoral strategist and foremost proponent of a two-party system for Japan, People’s Life Party leader Ichiro Ozawa, what is necessary is to form a new party. Otherwise any policy agreement among opposition parties cannot be considered a completely united line. He is correct in arguing that ‘the people have to have an image of one party for it to be an option’. Currently the smaller parties are struggling to present a distinct policy profile to the electorate.

Those dissatisfied with the LDP and its performance in office (and there are many) will likely swell the ranks of non-voters rather than vote for any of the opposition parties. The polls clearly show that Abe’s decision to call the election is regarded unfavourably by a majority of voters.

For these reasons, then, the upcoming election should be seen as a mark of Abe’s political opportunism rather than a contest about substantive policy issues.

Aurelia George Mulgan is Professor at the University of New South Wales, Canberra.

Categories: Forum

A new vision for Australia-India relations

East Asia Forum - Mon, 11/24/2014 - 04:00

Author: Sourabh Gupta, Samuels International

Australia and India have not always been the best of friends.

Seven Indian prime ministers from across the political spectrum and spanning three decades have come and gone without paying a state visit to Canberra, a record broken only now with Prime Minister Narendra Modi’s recent visit to Australia following the Brisbane G20 Summit. Four unreciprocated visits were made by Australian prime ministers during the latter half of this period. Australia’s strategic discovery of a ‘shared values’ partner in India too has been a near-term development. The Coalition government under John Howard did not deem relations with New Delhi to be a significant interest, let alone a significant bilateral relationship, in its first Foreign and Trade Policy White Paper in 1997.

Australian and Indian friendship has been forged in war yet they have not always shared a uniform vision of the peace thereafter.

From the sinking of the German cruiser SMS Emden near the Cocos Islands in the Indian Ocean in November 1914 to the battlefields of Gallipoli, El Alamein and Burma, Australians and Indians have fought, and died, side by side. At the Paris Peace Conference in 1919 and again at San Francisco in 1951, the two countries went their separate ways. Prime Minister Billy Hughes stoutly defended racial privilege and sought territorial annexation in Paris. Nehru’s India, citing a range of objections from the dependent status of Japan to the forcible alienation of Taiwan from China’s fold, refused to show up in San Francisco. India’s engagement with — and importance to — the San Francisco system was marginal.

Australia and India are multicultural societies that value free association yet do not share a common belief in democracy’s role as a key organising principle in international relations.

The linkage between democratic political systems and a more peaceful world is readily apparent to Canberra, conditioned as it is in the Western tradition by Europe’s bleak post-Westphalian past where four of five great power transitions sowed conflict. New Delhi subscribes neither to the democratic peace and hegemonic power transition hypothesis, which views conflict as inevitable, nor to the premise that the likelihood of China’s peaceful rise will increase if the great maritime democracies of the Indo-Pacific are aligned in formation. Ad hoc ‘shared values’ defence arrangements in Asia hold little appeal to New Delhi. Regional tradition, historical circumstance, economic interdependence and the distribution of comprehensive national power, rather, will determine the fate of the Asian Century.

Australia and India share an abiding interest in the maintenance of a stable strategic balance in the Indo-Pacific yet hold no symmetry in view of the means to forestall one-power domination.

Canberra exchanged its apron strings of empire for a more self-reliant posture and capabilities within the US-led hub-and-spokes system. Within this alliance, it has styled itself variously as a middle power or a not-insubstantial local power and sought to translate its military loyalty into influence with Washington to ensure the latter’s sustained and enlightened engagement in Asia. Extension or acceptance of alliance-based mutual security obligations is inconsonant with the principles of New Delhi’s statecraft. It has chosen to rise instead in the international system as an independent pole, seeking out autonomy-minded partners along the way in the Indo-Pacific region and beyond. It is telling that in spite of the bonds of language and people-to-people ties, New Delhi’s favoured strategic partners in Europe are France and Germany — not the United Kingdom. Its essence of strategy in the Asian Century is to ensure that no one set of great power relations is advanced to the detriment of another. Far from aiming at forestalling one-power domination, this multi-aligned strategy has Beijing as a key pivot..

Australia and India are resident Indo-Pacific powers yet the exigencies of geography — and geo-strategy — are dictating separate approaches to the ‘Indo’ and to the ‘Pacific’ theatre of operations.

Relatively secure in its southern ocean, Australia’s defence strategy has concentrated on denying a significant external power with unfriendly intent from acquiring major strategic influence in its maritime periphery. As the supposed ‘downward thrust’ of Chinese power re-establishes itself in Southeast Asia, Canberra’s Pacific alliances, which geo-strategically ring the semi-enclosed seas of East Asia, are being tightened. Denied such margin of security by geography, independent India grafted a spheres-of-influence model on its subcontinental periphery — at times with Bismarckian purpose.

As its power projection capabilities in the Indian Ocean have grown in time, New Delhi’s leverage to exert pressure at sea for quiet on the Sino–Indian land border, as well as trade its (slight) naval footprint east of Malacca for tacit recognition of vital interests in its own oceanic backyard, has grown commensurately. Its underlying spheres of influence calculation though has remained intact. It is telling that even as Australia–Japan defence cooperation has raced ahead with logistics sharing, intelligence exchange, defence technology transfer, status of forces discussions and scenario-relevant military exercises, the ambition in the corresponding India–Japan relationship — let alone that with Australia — remains confined to cooperative non-traditional security functions.

Forty six years ago, Gough Whitlam, Australia’s remarkable Vietnam-era leader, had exhorted his countrymen and women to strive constantly to devise new ways of integrating Australia with its Asian neighbours, while simultaneously promoting among these neighbours policies based on regional consciousness and interdependence. His counsel remains as relevant today as then, and applies to both countries. Australia and India must constantly strive to identify and advocate, at home and to the region, the shared strategic interests that bind the Indo-Pacific together based on the twin pillars of regional consciousness and economic and security interdependence. Even as they do so, they should stay mindful of the gap in their own interests, traditions and worldviews.

Gough Whitlam’s prescient vision of a peaceful and prosperous region at the confluence of the two great oceans remains a tantalising prospect today. A conception of regional order that accommodates the secular and religious traditions of the great monotheistic and polytheistic faiths and seats its key military protagonists within the four walls of its primary security forum has no parallel in modern history. It is a vision of order worth striving for.

Sourabh Gupta is a Senior Research Associate at Samuels International Associates, Inc., Washington.

Categories: Forum

The new nuance in Chinese diplomacy

East Asia Forum - Sun, 11/23/2014 - 18:00

Author: Peter Drysdale, East Asia Forum

Much energy has been expended on projecting the impact of the rise of Chinese economic power on its political and military might and the strategic contest with the United States. In a conflation of geo-economic and geo-strategic analysis, two camps have emerged: one warns about the consequences of the United States not conceding strategic space as Chinese economic and strategic power continue to grow; the other asserts the continuing dominance of US military-strategic and economic power as Chinese power peaks, in some scenario or another. As the nuance in Chinese diplomacy over the past week or two suggests, the geo-political and economic world would appear a tad more complex than either camp allows.

There is certainly no evidence that there is a one-for-one relationship between economic size and political and military power — defence spending and military capacity varies greatly as a share of GDP across countries — though there is clearly a degree of interdependence between these variables. The mobilisation of military capability is, for one thing, likely to lag behind the growth of economic size — itself the product of both the population base of countries as well as their industrial sophistication reflected in output per capita. And economic size and its impact through the international economy yield their own independent dividend in political power, although how that dividend is reaped depends very much upon the way in which the rules of the game in international exchange are organised.

In the interwar period, at the end of the age of imperialism, the industrial powers were also imperial powers and the international system was ordered largely around the contest of imperial power. After the Second World War, the Bretton Woods system entrenched a set of principles and rules that secured the gains from trade and international exchange without resort to the use of imperial and military power. It is true that the system needs a revamp — a matter that is squarely on the agenda of the G20 today — because the structure of governance and modus operandi of its core institutions such as the IMF, the World Bank and the WTO, need updating to reflect the growth in importance of the emerging economies and new issues. But it is still happily the foundation of a functioning multilateral trade and economic (as well as political) regime that underpins global economic security today. Only if that system were to fall into disrespect by the major powers or disintegrate would we revert to a world in which the correlation between economic and military power dominated overwhelmingly the economic and political security equation.

This — admittedly truncated — analysis serves simply to remind us that the international system today is, technically speaking, very much a mixed interest game. The cacophonous chorus around the analysis of the rise of China tends to fall quickly into casting it otherwise — as a simple zero-sum game and ill-prepares us for the range of nuance in strategies that can, and need to, be brought to bear on managing the shift in Asian power that is its consequence.

The APEC summit in Beijing began with the notable symbolism of the forced shut-down of pollution-generating factories for a week of welcome blue skies in the capital — a taste of how it might be if the big, hard decisions on pollution control and carbon emissions can be digested (as the Beijing wags put it, a new meaning for APEC as Air Pollution Eventually Controlled). The climate change agreement reached with the United States, of course, was not a binding international agreement on the two countries’ climate change strategies but was no less remarkable as a joint declaration of national commitments. Importantly, it signified China’s willingness to accept actual target dates for a reduction in total emissions. ‘That’s important for climate change’, the Economist declared, ‘but it is also a signal that China is going to grasp the responsibilities that come with being a global power’.

In the area of economic diplomacy, China launched the Asian Infrastructure Investment Bank just prior to the APEC summit and gained endorsement for the realisation of a Free Trade Area of the Asia Pacific (FTAAP). China also reached a substantive agreement with South Korea on their bilateral FTA, moved to conclude a significant bilateral with Australia and had a breakthrough on negotiations with the Americans to expand the coverage of the Information Technology Agreement — which promises to re-energise a US$1 trillion market in technology goods trade.

These developments may also have signalled the start of a shift in China’s foreign policy. In many ways, China to date has been a weak diplomatic power. It doesn’t have many allies, and has not had a clear vision of its goals on the international stage. This looks like it’s beginning to change.

Our lead essay from Mireya Solís this week asks why China chose FTAAP as its landmark initiative for the APEC summit. ‘The FTAAP’, she points out, was a concept which ‘was first developed by the Americans, so why did China borrow it to stake a leadership claim in defining the future of Asia Pacific economic integration?’

She advances three good reasons. First, FTAAP defines a grand regional vision that encompasses both China and the United States. Second, it takes the focus off the TPP without challenging it with an exclusively Chinese option — as the Regional Comprehensive Economic Partnership (the ASEAN+6 initiative) is commonly but wrongly described. And third, it puts China on the same pedestal in crafting a new regional and global trade order.

These developments, and signs of flexibility in China’s management of its neighbourhood problems in the South China Sea around the East Asian Summit and earlier with Japan at APEC, signal a mature and nuanced Chinese diplomacy. As Solís says, there is scant evidence that China is a revisionist power. China to date has been a relatively weak diplomatically. A more influential role in regional and global affairs will inevitably attract increased scrutiny. If it is prepared to accept and respond constructively to that, as it has in recent summitry and in managing its relations with Japan, South Korea and Australia, it may yet deliver a new model of great power relations, because of contemporary circumstances as well as by design.

Peter Drysdale is Editor of the East Asia Forum.

Categories: Forum

China flexes its muscles at APEC with the revival of FTAAP

East Asia Forum - Sun, 11/23/2014 - 04:00

Author: Mireya Solís, Brookings Institution

The 2014 APEC leaders’ summit witnessed a string of successes in Chinese trade diplomacy. Key among these successes was the endorsement of China’s signature trade initiative as APEC host: the realisation sooner rather than later of a Free Trade Area of the Asia Pacific (FTAAP).

China also reached a substantive agreement with South Korea on their bilateral FTA and a breakthrough on negotiations with the Americans to expand the coverage of the Information Technology Agreement — which promises to re-energise a US$1 trillion market in technology goods trade.

But why did China choose FTAAP as its landmark initiative for the APEC summit? The FTAAP concept was first developed by the Americans, so why did China borrow it to stake a leadership claim in defining the future of Asia Pacific economic integration?

At least three motivations seem plausible.

First, to make a big splash in defining the trade agenda by pursuing the most ambitious goal of all: an Asia Pacific trade grouping incorporating both China and the US. Second, to prevent the Trans Pacific Partnership (TPP) from becoming the focal point of economic integration efforts and a reaffirmation of America’s leadership as a Pacific power. And third, for China to carve a much more proactive role in drafting the new rules of the economic order — from a position of equal standing with the United States. Potential entry into the TPP, after it enters into force, would not award China these advantages: China would have to abide by disciplines negotiated by others and would have to make significant concessions to ensure its accession.

Does China’s spate of trade initiatives at APEC augur the emergence of a Chinese-led international economic order? Not yet, as China’s trade diplomacy is reactive, not revisionist. China has moved defensively, agreeing for example to Japan’s longs standing proposal to negotiate a trade agreement among the ASEAN+6 countries (today’s RCEP), out of concern with Japan’s TPP accession. Moreover, China’s endorsement of FTAAP meets a core American national interest: that no lines will be drawn in the middle of the Pacific.

But make no mistake that China is seeking more influence in international economic affairs to match its ranking in global GDP. As China seeks a greater role in the management of the global economy, closer scrutiny of its leadership capabilities will ensue.

In particular, two questions loom large regarding China’s potential to build an alternative trade regime. First, can China become a focal point for economic integration? The preeminent role of China in Asia’s trade flows (as the top trading partner for many countries in the region) is widely known. But a lot of this is trade in components, with China still making a modest contribution to the value added of a final product consumed elsewhere. The key question is whether China can rebalance its growth strategy towards domestic demand and develop lead firms capable of generating their own supply chains in the region. Can China evolve from its position as a central cog in global supply chains, to become — in its own right — the lead economy for the region?

Second, can China offer a distinctive solution to the challenge of deep integration? Supply chain trade has put a premium on negotiating behind-the-border rules to ensure property rights and improve the business climate: service liberalisation, competition policy, regulatory transparency, and the like. But many developing countries have resisted the WTO+ agenda as encroaching on their policy space.

Can China offer a way out of this impasse? Negotiating a run-of-the-mill trade agreement (with rampant exclusions and thin on rules) will generate political gains for China (never to be dismissed), but will not yield an effective architecture to meet the institutional demands of the dominant driver of international trade: supply chains. What then is China’s vision for a twenty-first century trade regime?

Answers to these questions will be of paramount importance. The APEC summit meeting underscored that China’s views cannot be ignored, they need to be accommodated. Hence, the leaders’ statement delivered a carefully calibrated compromise agreeing to the realisation of FTAAP as early as possible (advocated by China), but only after the completion of ongoing pathways (code for TPP) at US insistence.

The United States effectively eliminated any reference to a specific timeline for FTAAP conclusion, but China managed to secure the launch of a collective strategic study on issues pertaining to FTAAP’s realisation. It remains to be seen whether this compromise will hold in the long run. Beijing’s roadmap for FTAAP (included as an annex in the leaders’ statement) blurs the issue of timing by stating that the early realisation of FTAAP should build on ongoing regional undertakings (not making their successful conclusion a prerequisite).

With the absence of a breakthrough in US–Japan market access negotiations, the statement from TPP leaders gathering on the sidelines of the APEC meeting was much more subdued, noting only that the ’end is coming into focus’. This is the greatest irony behind the inability of the United States and Japan to reach a deal: as time runs out to deliver a timely success on TPP they are letting China win by default.

Mireya Solís is Philip Knight Chair in Japan Studies and Senior Fellow, Center for East Asia Policy Studies at the Brookings Institution.

Categories: Forum

A good week for global governance

East Asia Forum - Sat, 11/22/2014 - 04:00

Authors: Alan S Alexandroff, University of Toronto, and Yves Tiberghien, UBC

For global governance watchers, this was the big week of the year. Between 7 November and 16 November, the world witnessed an APEC meeting in Yanqi Lake near Beijing complete with a bilateral China–Japan ‘breakthrough’ and a major US–China climate deal; an historic ASEAN and East Asia Summit held in Naypidaw, Myanmar; and a colourful G20 meeting in Brisbane, Australia.

Notwithstanding the chorus of those announcing growing disorder, global order seems better off after these summits.

The IMF, in its recent World Economic Outlook, points out that the world economy is in a difficult stage: global growth is slowing, trade protectionism remains a problem, inequality is rising and eroding support for globalisation, and environmental challenges appear to be rising faster than the global system appears to have the capacity to cope.

Many pundits predicted a weak post-midterm election period for Obama, tense relations between the West and Russia, uncertainties about a possible handshake between Chinese President Xi Jinping and Japanese Prime Minister Shinzo Abe, and weak institutional outcomes. Against expectations, the series of summits taking place over the last week and culminating with the G20 Leaders’ Summit in Brisbane made a material difference and advanced global governance.

The summits allowed leaders of key countries to arrest the slide toward conflict and zero-sum games, giving them a platform for mutually beneficial cooperation. This could be seen in the surprisingly positive US–China summit in Beijing, which may have given impetus for the modest US–India WTO breakthrough in Naypidaw, in turn setting the stage for a stronger final G20 declaration than expected.

And despite competition between the US and China on various fronts (such as trade, development, and global institutions), there were healthy signs on global economic architecture. There was reaffirmation of support for a pan-Pacific free trade effort (FTAAP at APEC and RCEP at EAS) and progress on global tax cooperation. More surprisingly, there was progress on anti-corruption efforts. Overall this means progress in strengthening global institutional architecture and a modest increase in trust for the global economy.

It is also clear that the two players that dominated the global game throughout the sequence were China and the US. Both played stronger cards than expected. They jointly produced the biggest surprise of the week, namely the four main bilateral agreements announced on 12 November. In addition to the climate deal with potential catalytic impact, the two countries reached agreements on IT trade going back to the WTO’s Information Technology Agreement, the strengthening of military-to-military contacts, and a reciprocal visa deal with 10-year visas for businesspeople and students.

By contrast, the voices from Europe, Japan, Russia, and India sounded weaker. It is fascinating to contrast the more multipolar situation in the London G20 in 2009 to the more ‘G2-like’ world of 2014. Likewise, the voice of middle powers such as Australia, Canada, and South Korea also seemed weaker at this summit. Australia as Chair fought against the US (and EU interests) on climate change and lost. It fought against the BRICS on Russia’s participation and also lost.

What of the tricky points?

Although word had been that Chinese opposition would preclude agreement on an anti-corruption strategy, in fact the Chinese opposition faded. And as a result the G20 has ratified a 2015–16 G20 Anti-Corruption Action Plan. Importantly in the Plan there is a call for countries to share information about trusts and shell companies used in tax evasion and money laundering.

In addition, the G20 took further steps to deal with tax avoidance. Though not a surprise, the efforts to advance the Base Erosion and Profit Shifting (BEPS) agenda appear to remain front and centre of G20 action. G20 leaders affirmed the principle of taxing profits in the country where value (and hence profit) is created. They also committed to finalising the BEPS Action Plan in 2015.

One surprise was the rather pointed statement on the failure to implement IMF quota reform. If the reform is not passed by the end of the year — that is, if the US Congress fails to pass the legislation to provide for a capital increase — the G20 declared that it would ask the IMF to prepare other options.

The US–China summit and the final G20 declaration with associated pledges for the Climate Green Fund (especially by the US and Japan) generated surprisingly positive momentum on the climate front. This was a strong statement — especially given Australian opposition — urging announcements on G20 countries’ nationally determined contributions to CO2 reductions in advance of the UN Climate Change Conference in Paris next year.

The bottom line on Australian efforts as Chair is that even though the government’s rhetoric far too often appeared better suited for an Australian election than a global summit, the Australians can be pleased that a number of initiatives made significant progress. There was consistent effort to advance the macroeconomic and financial reform agendas. Still, the APEC meeting was where the big agreements were announced.

All of this reveals a combination of advancement in global institutions and competition between the US and China. On the whole, the US and China both won and the global public good benefited as well. Competition between China and the US continues, not surprisingly, but the week showed that the major powers could advance collaboration even while remaining competitors, especially in the Asia region.

All in all it was a good week for global summitry, and good week for US and Chinese leadership too.

Alan S Alexandroff is Director of the Global Summitry Project at the Munk School of Global Affairs, University of Toronto.

 Yves Tiberghien is Associate Professor of Political Science and Director of the Institute of Asian Research at the University of British Columbia

 A longer version of this article first appeared here, at Global Summitry Project

 

Categories: Forum

Where are Hong Kong’s moderate democrats?

East Asia Forum - Fri, 11/21/2014 - 16:00

Author: Steven Yet, University of Toronto

After weeks of protests, the protracted stalemate in Hong Kong doesn’t appear to be over. While the Occupy Central movement has brought together civil society groups to protest for democratic change, the movement lacks active participation from the political side. Progress cannot be made unless the Occupy Central movement engages with the political community.

Any real progress needs the active collaboration of both political society and civil society. While civil society is able to launch large-scale protests — as seen in the Occupy Central movement’s ability to draw large crowds when it began its civil disobedience campaign in September — it lacks the organisation to push for progressive political reform, a role which should be taken up by political society, which has the power to influence the Legislative Council.

The political compromise between Beijing and Hong Kong democrats in 2010, though not comprehensive, was a notable moment in the history of Hong Kong democratisation. While acknowledging that any electoral reform must be in accordance with the Basic Law, both sides agreed on the proposal that the franchise of the five new special interest Functional Constituency seats be expanded to include all voters who were not eligible to cast a ballot in any functional constituency — a move that would render these seats popularly elected in all but name.

Why has this kind of real bargaining in the form of incremental democratisation now given way to confrontational tactics and radicalisation? The decline of moderate democrats is the key.

The political compromise in 2010 led to internal strife in the pro-democracy camp. The ‘moderate democrats’ within the Democratic Party moved away from the ‘radical democrats’, who were anxious at the prospect of a long wait for full democracy and opted for more drastic action. In a move to separate themselves from the radicals, the moderate democrats established the Alliance for Universal Suffrage, now called the Alliance for True Democracy.

The story was not over. The results of the 2012 legislative council election reflect a noticeable change in Hong Kong’s democracy movement. The political landscape has changed significantly since the 2012 elections. The Democratic Party was blamed for having “sold out” the pro-democracy camp in 2010 and suffered a catastrophic defeat, losing the position of leader of pan-democrats for the first time. In terms of seats, it dropped from eight to six. The loss was reflected more accurately in vote shares, with a 7 per cent fall compared with the 2008 election. In contrast, radical democrats from the People’s Power Party, the League of Social Democrats and the Neo Democrats gained three more seats, bringing their total to five seats in the Legislative Council. The radical wing, in particular, collected more than 15 per cent of the vote in the direct elections, surpassing the Democratic Party’s share.

The fall of moderate democrats in the Legislative Council, along with protests that forced the authorities to back down on the issue of national education in 2012, emboldened the radical wing of the pro-democratic movement.

The fact that civil society activists want to distance themselves from moderate democrats is not a healthy sign. The political impasse is due less to lagging public support than to a lack of mutual trust between Beijing authorities and democratic forces in Hong Kong. The moderate democrats are unable to mediate between Beijing and civil society activists, and any radical attempts only make the distrust between Beijing and the democratic forces in Hong Kong worse and reform less likely.

The current protests are led by civil society groups, including Occupy Central leaders, the Hong Kong Federation of Students, and Scholarism, rather than by moderate democrats in the Legislative Council. Civil society groups and the moderate democrats now need to work together in hopes of winning maximal concessions from Beijing. Civil society cannot achieve substantial progress on its own. If civil society and moderate democrats find a way to work collaboratively, both sides will have a better chance of achieving real progress.

Steven Yet is a doctoral student in the Department of Political Science at the University of Toronto. He is also an associate member at the Center for Civil Society Studies at the Chinese University of Hong Kong.

Categories: Forum

Why the AIIB presents an opportunity for New Zealand

East Asia Forum - Fri, 11/21/2014 - 04:00

Authors: Cassandra Shih, Victoria University of Wellington, and Benedict Xu-Holland, ANU.

So far 20 countries have taken up China’s open invitation to found the Asian Infrastructure Investment Bank (AIIB). Notably absent at the signing were Australia, Indonesia and South Korea, who did not definitively respond to the invitation. Until a week before the signing it seemed likely that Australia would join, but it eventually withdrew, citing ongoing transparency concerns similar to those voiced by US officials. The US likely sees the new bank as a threat to the US and Japan’s status as the regional norm-shapers of development finance.

The AIIB presents an opportunity for New Zealand to amplify its impact in the region. Though not a member of the AIIB, New Zealand is in a prime position to help manage future Pacific projects that attract AIIB backing. New Zealand’s small size and relative lack of geopolitical alignment allow it to pursue partnerships with both the US and China, while experience working in the Pacific makes its input on projects valuable.

At its core, the establishment of the AIIB is a product of China’s dissatisfaction with existing US-dominated development finance institutions. China’s share of the vote in the Asian Development Bank (6.47 per cent) and the World Bank (5.17 per cent) does not reflect its economic power. Current levels of lending by the ADB and the World Bank fall far short of meeting the region’s acute demand for infrastructure investment. Loans from these institutions are also burdened by extensive transparency and good governance requirements.

China, on the other hand, has an interest in promoting a set of development norms based on political non-interference. China also stands to gain favour with its neighbours if its investment model can successfully spur regional development.

China has made large commitments to the New Development Bank (NDB) and the AIIB. So far China has taken responsibility for supplying around 40 per cent of the NDB’s US$100 billion contingency fund, more than twice the amount put forward by the other members, and half the AIIB’s initial US$100 billion capital fund.

The suspicion with which some view China’s expansion into multilateral development finance is unwarranted. While Beijing is attempting to increase China’s influence in the Asia Pacific, its actions amount to economic and political common sense. China has previously been criticised for being a passive power and demonstrating lacklustre leadership on international issues. Its significant capital reserves must be mobilised if the region’s infrastructure needs are to be met.

China wants to increase regional prosperity, boost its global leadership credentials, procure financial wins for Chinese state-owned enterprises and secure votes in organisations like the UN. China therefore has strong incentives to act as a responsible power.

Until recently, China has been averse to pooling its aid money with others for fear of losing autonomy. In 2012 it turned down an invitation from Australia to join the Cairns Compact to promote transparency in aid flows in the Pacific. A senior Chinese delegate Wang Yongqiu said, ‘We have different approaches and practices from Western developed countries. We feel it is unnecessary to accept this multilateral coordination mechanism, but we need time to study it’.

Now that China has established multilateral coordination mechanisms of its own, New Zealand should seek ways to contribute to the AIIB’s success, at least where the Pacific is concerned. The lack of involvement by other Western countries in the AIIB should not deter New Zealand. Indeed, New Zealand has a track record of firsts when it comes to China. New Zealand was the first developed country to sign a free trade agreement with China in 2008. It was also the first developed country to announce a trilateral development project with China in the Asia Pacific, with a NZ$50 million (US$38.5 million) project to improve water quality in the Cook Islands in 2012.

Of course, successful collaboration depends on clear-eyed risk assessment. Internationally, New Zealand has an iconic brand built around its reputation as a fair, independent, green and safe country. Threats to this brand are taken very seriously, with the memory of the 2008 Sanlu milk scandal still raw in the New Zealand political and business psyche. New Zealand must therefore be selective in the projects it chooses to become involved in.

Another risk for New Zealand is whether China–New Zealand development cooperation might inadvertently cool New Zealand’s recently strengthened security relationship with the US. In 2010, the Wellington Declaration was signed, symbolically patching the rift caused in 1984 by New Zealand’s anti-nuclear policy. Following the signing, the former US secretary of state, Hillary Clinton, described the US–New Zealand relationship as ‘stronger and more productive than it has been in 25 years’. Ironically, US appetite to re-engage with its traditional allies in the region is partly motivated by a desire to reinforce its sphere of influence in the face of a rising China.

Whether it is worth stepping back from this progress with the US to pursue opportunities created by the AIIB will depend on how willing New Zealand is to use the full policy space available and engage independently with its partners.

A successful New Zealand foreign policy depends on working with all significant powers in the Asia Pacific. A reliance on the economic goodwill of China and on informal security relations with its traditional partners means that New Zealand must walk a tightrope between the two. Remaining flexible and agile will be key to ensuring that New Zealand benefits from a rising China, while being able to advance Pacific development and the credibility of its independent brand.

Cassandra Shih is a recent graduate from the Victoria University of Wellington.

Benedict Xu-Holland is a student and Education Officer at the College of Arts and Social Sciences, the Australian National University.

Categories: Forum

Political Islam in Bangladeshi democracy

East Asia Forum - Thu, 11/20/2014 - 16:00

Author: Mubashar Hasan, Griffith University

Recently Bangladesh was side-tracked from an electoral democracy. Earlier this year, the ruling party Awami League formed government after a one-sided election. Bangladesh’s major opposition party, the Bangladesh Nationalist Party (BNP), boycotted the election on the grounds that it was not taking place under a neutral government and that elections held under partisan governments would not be fair.

Since the early 1990s Bangladeshi political parties had agreed to hold national elections under non-partisan, neutral governments after the collapse of the Ershad regime and the coming of multiparty democracy. The 2014 election marked a sharp break with this tradition.

Foreign aid, western NGOs, the World Bank and the IMF have helped Bangladesh make considerable progress in health, literacy and general wellbeing. As Amartya Sen has argued, the level of social progress achieved by Bangladesh had brought the country ahead of its much larger democratic neighbour, India.

The problem for Bangladesh, however, is that its politics — embedded with violence, corruption and clientelism — have betrayed its social progress. Worse, radical Islamism has also gained a stronghold in the country. As the gap between poor and rich in the country widened, the idea of Islam being an integral part of politics became more popular. 87 per cent of respondents to a 2013 Pew Research survey said that it is a bad thing that Bangladesh does not fully apply sharia law.

European and American history has shown that liberal democracy can flourish within a religious society. The specific problem for Bangladesh is that both major political parties have injected religion into key state policies such as the Five Year Plans and the state-run Islamic Foundation, as well as educational establishments such as schools, college and universities.

The state-sponsored Islamisation process, later backed by both the BNP and the Awami League, began in the 1980s with active financial support from wealthy Muslim states in the Middle East, who after their defeat in the Arab–Israel war in 1970s and because of their antipathy to Western support for Israel, initiated a global Islamisation process. The aim of this Islamisation process was to resist what these states saw as the Westernisation of poor Muslim states.

A large number of Bangladeshis equate democracy with aspects of economic development, like the building of infrastructure. And while this represents a failure of those who advocate democracy to explain what it is or how it benefits Bangladeshis, it’s easy to see why many are focused on the practical rather than the political. Bangladesh’s government and its NGOs need to work much harder to make ordinary citizens aware of the fruits of democracy including civil and political rights.

The dynastic nature of both national political parties, and the long-standing tendency of party leaders enriching themselves via corruption, can partially explain why both the Awami League and BNP try to distract citizens by promoting a religious identity. The BNP’s alliance with the right-wing Jamaat-e-Islami, a party modelled on the Muslim Brotherhood in Egypt, has made the political situation more complex.

The Indian government raised allegations that during the period of BNP–Jamaat government in 2001–06, with support from Pakistan’s spy agency, Jamaat was responsible for exporting terrorism to India, hence India’s support of the Awami League’s one sided election in 2014. In contrast to India, all Western nation states called for a new election.

In order to try to persuade the Awami League not to hold an election overseen by a partisan government, UN Secretary-General Ban Ki-moon sent his special envoy Oscar Fernandez Taranco, the Assistant Secretary-General for Political Affairs, to attempt to broker a deal between the Awami League and the BNP in 2013. He failed to broker an agreement, and left the country.

The distinction between Bangladesh’s major parties and conventional Islamist parties in terms of engaging or integrating Islam into politics is minimal. Major parties have both constructed an environment in which religion holds an increasingly strong influence in Bangladeshi society. Political Islam sets the framework of Bangladesh’s politics, and is likely to remain so for the foreseeable future.

Mubashar Hasan is a PhD candidate at the School of Government and IR, Griffith University. He is also the co-founder of Alochonaa, a non-religious and non-partisan platform to foster dialogue among civilisations.

Categories: Forum

South Koreans defend their rights in cyberspace

East Asia Forum - Thu, 11/20/2014 - 04:00

Author: Eun Jeong Soh, ANU

Over 3 million South Koreans have downloaded a Germany-based smartphone messenger app, Telegram, while 400,000 users of Kakao Talk — the nation’s most widely used messenger app — terminated their account, in protest against government attempts to crackdown on dissenters.

The mass boycott of Kakao Talk occurred in response to the public prosecutor’s initiative to impose surveillance on personal messaging services. Kakao Talk is an integral part of everyday life of Koreans; of the country’s population of 50 million, 35 million use the smartphone application. By terminating their user accounts, these ‘cyber exiles’ asserted their right to privacy and freedom of expression and attracted domestic and international attention regarding the state’s intrusion and control of cyberspace. In response, Daum-Kakao hurriedly announced that the company would not in the future cooperate with the public prosecutor’s warrants for wiretaps or access to stored messages, and would adopt appropriate technology to prevent government screening.

The state control and manipulation of cyberspace and online platforms has been a growing concern since the National Intelligence Service’s systemic involvement in online commenting became evident in the last presidential election. The government access to personal messaging services is a particularly alarming move; it substantiates the concern that the government is determined to monitor private communications in order to protect the president. It began with President Park Geun-hye’s remark on 16 September ‘not to neglect debunking remarks which bring about social polarisation’ in the context of a prolonged debate over the president and the government’s response to the sinking of Sewol. In response to this remark, the public prosecutor demanded four major domestic IT companies to cooperate with the prosecutor’s request to ‘gain real-time access, share information and delete messages’ that are considered ‘groundless rumours on socially controversial issues, false statements, and debunking statements’. 

But it was revealed that government surveillance on private messaging services had occurred in the past. In the first half of this year, Daum-Kakao received 61 warrants to wiretap user accounts and 2131 requests to release user information, and the company had cooperated with more than three quarters of the requests. This means ‘near real-time’ surveillance as well as a large-scale screening of completed contents had already been made. It was further revealed that the number of police searches of e-mails and mobile messengers has doubled under President Park’s administration.

This raises a further concern that government agencies can gain access to the servers of the companies and can freely collect information even without search warrants, as the United States’ NSA and FBI did in cooperation with nine IT companies under the PRISM program. 

So how did Telegram come about as an alternative? Kim Ŏ-joon, the host of an internet-only show Papa Is, introduced Telegram as a safe alternative on 1 October, thanks to its commercial-in-confidence chat function which does not save records on the servers, and a delete function which allows users to erase messages forever on both sides of the conversation. What was further attractive about Telegram was its philosophy, reflected in the app motto, ‘Taking Back Our Right to Privacy’. Kim commended the founder, Pavel Durov’s, refusal to release VK (Russia’s largest social network) user information upon the request of the Russian Federal Security Service, which was contrasted with Kakao Talk’s docile response to the demands of the South Korean government. The software used in Telegram were considerate choices based on the founder’s consciousness about privacy protection. Within one week of the release of the show, 1.5 million Koreans registered as Telegram users.

This mass action taught South Korea’s IT companies and engineers an important lesson: that the rights of the user should be the foremost priority. The cyber exiles also taught the government that any further moves to violate privacy and curtail freedom of speech would damage its reputation and would attract critical international attention and scrutiny. But most importantly, it taught technology users that they themselves had a responsibility to be ‘technology-literate’ to protect their own rights.

Eun Jeong Soh is a post-doctoral fellow at the School of Culture, History and Language, at the ANU College of Asia and the Pacific. She participates in ARC Laureate Project, ‘Informal Life Politics’.

Categories: Forum

Uncertainty at home brings calm to the Thai–Cambodian border

East Asia Forum - Wed, 11/19/2014 - 16:00

Author: Nicole Jenne, European University Institute

Domestic uncertainties in Thailand and Cambodia have hindered progress along the heavily militarised border and the Preah Vihear temple dispute.

Between 2008 and 2011 the border around the ancient Khmer temple of Preah Vihear (Phra Viharn in Thai) was the site of repeated clashes between Thai and Cambodian troops. Open conflict was put on hold when Cambodia submitted the dispute to the International Court of Justice in 2011. More than two years later the Court confirmed Cambodia’s ownership over part of the disputed territory, leaving the adjacent area subject to bilateral negotiations.

Months before the military took power in Bangkok in 2014, Cambodian prime minister Hun Sen realised that he could no longer rely on a ‘red’, Thaksin-linked government holding power in Thailand. The Thai army made it clear that while it was tied up with the internal crisis, it would be in charge along the border as well. This was most obvious when the Thai government was unable to follow through with a plan to allow Indonesian observers, under the banner of ASEAN, to be stationed at the conflict site. The Abhisit-brokered agreement was rejected by a number of officers who had served on the Thai–Cambodian border and who enjoyed backing from the highest positions in the military. The situation did not change under Yingluck, who left the military free in dealing with Cambodia.

This prompted Hun Sen to end any visible support to Thaksin and the red shirt movement. This was a marked contrast to late 2009, when Hun Sen appointed Thaksin as his economic adviser and when he allowed tens of thousands of red shirt supporters to meet Thaksin when speaking in Siem Reap in April 2012.

Increasingly, Cambodia relied on military-to-military contacts to manage the situation on the ground, starting with local commanders, who were instructed to share not only information but also dried fish. When the Thai military took control in Bangkok, Cambodia’s Deputy Prime Minister and Minister for National Defence Tea Banh was the first ASEAN high-level politician to visit. Hun Sen did not waste any time, delivering his congratulations to Prayuth Chan-ocha the day after the Thai army chief was appointed prime minister. Cambodian officials even thanked the National Council for Peace and Order (NCPO) for managing the swift return of an estimated 200,000 Cambodian workers to Thailand, whose sudden outflow had ironically been triggered by the coup.

In Cambodia, Hun Sen’s Cambodian People’s Party lost 22 of 123 seats in the 2013 election. Economic development and job creation are now among the top priorities of the party to counter its loss of popularity, especially among the young generation. Good relations with Bangkok are therefore badly needed: Thailand is the second biggest importer of Cambodian goods after China. In addition, the Thai economy provides jobs for an estimated 400,000 Cambodians.

It is unlikely that Phnom Penh will be pushed to abandon its soft course. Despite — or perhaps precisely because of — the opposition’s overwhelming focus on the eastern border with Vietnam. The opposition parties have so far endorsed CPP’s policy in regard to Thailand. The border dispute effectively remained a non-issue when Cambodia protested a newly polished fence in front of Preah Vihear — in an area that is still to be demarcated — only days after the coup. When a shooting incident at a border post nearby made it into the news in early October 2014, both sides hushed up the issue. In the meantime, restoration works at the temple are undertaken with utmost care — to comply with the management plan endorsed by UNESCO’s World Heritage Committee and in order to avoid raising Thailand’s attention.

Cambodia would likely welcome talks on the land border and the maritime boundaries sooner rather than later. But the NCPO has signalled that talks will only resume once Thailand’s domestic situation is more certain. The border around Preah Vihear will doubtlessly remain a thorny issue. Any proposal by the Thai to develop the Preah Vihear World Heritage site jointly is likely to be ignored in Cambodia just as it happened when Prayuth brought it up at his visit in late October. But this does not foreclose other forms of cooperation in order to boost tourism at the temple. Nor does it mean that survey and demarcation work along the border needs to remain on standby. Talks on the maritime areas can also resume independently of the land border negotiations.

But with the question of royal succession looming over the Thai conflict, it is difficult to predict when Thailand will find a way out of its domestic crisis. Measures already adopted by the NCPO suggest that the military will strengthen its grip on power.

For the border dispute, this means a likely end to the high turnover of office holders and differing voices that have greatly increased uncertainty for Phnom Penh in the past. Now in the driver’s seat both at the border and in Bangkok, the Thai army will soon have to show how committed it is to put an end to the conflict. So while renewed fighting is unlikely, the Thai military will soon have to nail its colours to the mast.

Nicole Jenne is a PhD researcher at the European University Institute in Florence, Italy.

Categories: Forum

Remembrance, reconciliation and the East Asian memory wars

East Asia Forum - Wed, 11/19/2014 - 04:00

Author: Tessa Morris-Suzuki, ANU

‘The past’, as William Faulkner once wrote, ‘is not dead, it isn’t even past’. Nowhere is this more true than in today’s East Asia. The recent ‘memory wars’ between the countries of the region — particularly (though not exclusively) between Japan and its neighbours China and Korea — are eloquent testimony to the power of the past to haunt the present and influence the course of domestic and international politics.

As Cold War tensions in East Asia diminished from the 1980s onwards and as the events of the Asia-Pacific War receded, it might have been assumed that memories of war and colonialism would also fade. Instead, the opposite has happened. Unresolved issues of historical justice and restitution have smouldered and, fanned by the winds of rising nationalisms, emerged as sparks which threaten to ignite new regional antagonisms.

In the past two years particularly, the governments of the region have staged a series of contending political performances to enshrine or to erase the memory of particular historical events, particularly events associated with Japan’s early twentieth century imperial expansion and the Asia-Pacific war. The December 2013 visit by Japan’s Prime Minister Shinzo Abe to the Yasukuni Shrine — the Shinto shrine to the war dead in which executed war criminals are also venerated — evoked fierce criticisms from Korea and China.

These criticisms were amplified in mid-2014, when the Japanese government appointed a committee to re-examine the process that led to the issuing of the 1993 Kono Declaration, which is the Japanese government’s most significant apology to women from Korea and elsewhere coerced into military brothels during the war. The committee’s report is widely perceived as having undermined public confidence in the declaration and undone much of the good achieved by the 1993 apology.

Meanwhile, in January 2014 a new museum was opened inside railway station in the Chinese city of Harbin, the site of the assassination in October 1909 of Japanese elder statesman and former resident-general of Korea Ito Hirobumi. The memorial, proposed during the meeting of South Korean President Park Geun-hye with Chinese president Xi Jinping in 2013, was greeted with expressions of outrage from the Japanese government and from many sections of the media in Japan, for it honours the memory not of Ito but of his assassin, prominent Korean nationalist Ahn Jung-geun, who was subsequently executed for the crime by the Japanese Kwantung military administration. Japan’s Chief Cabinet Secretary, Suga Yoshihide, lodged official objections with the South Korean and Chinese governments, describing Ahn as ‘a terrorist who was sentenced to death for killing our country’s first prime minister’. The memorial’s proponents, on the other hand, retort that Ahn was not a mere assassin but a political idealist and the author of a visionary (though incomplete) plan for peace in East Asia.

But it is perhaps a small incident, little reported in the global media, that most poignantly highlights the destructive, and self-destructive, nature of these conflicts. In 2004, a group of concerned citizens from Japan’s Gunma prefecture erected a monument to Korean forced labourers in a local park. The monument commemorates Koreans who were forcibly brought to Japan during the war to work in mines and on construction sites, where many died. It is a simple stone structure, whose inscription includes the words ‘remembrance, reflection and friendship’ in Japanese, Korean and English. Memorial ceremonies at this site have brought together Japanese locals and members of the Korean community in Japan in shared acts of commemoration.

The Gunma monument is just one of many small-scale local efforts by Japanese citizens and Korean residents in Japan to inscribe the memory of war in public consciousness and to promote a better shared understanding of wartime history between Japan and its neighbours. Dozens of similar citizens’ initiatives have emerged over past decades in a number of local communities from Hokkaido in the north to Kyushu in the south. Japanese academics, publishers, schoolteachers and others have also initiated a wide range of cross-border networks with counterparts in China and South Korea in an effort to create better common understandings of history.

Though these grassroots actions have had relatively little effect on government policy, and have rarely been reported by the media inside or outside Japan, they demonstrate a widespread and sincere popular Japanese recognition of the wrongs of the past and a hope for peaceful relationships with the other peoples of the region.

But now, with the rise in nationalist emotions in Japan and the region more widely, the Gunma memorial has come under attack from a variety of right-wing groups whose members have bombarded the prefectural government with complaints that the monument is ‘anti-Japanese’. In July 2014, the prefectural authorities announced that they would not renew the planning permission that allows the Gunma monument to remain in place, forcing the citizens who created this symbol of reconciliation and goodwill to remove it. Elsewhere, similar attacks on the work of reconciliation groups are gathering force.

Reading news reports on the Gunma monument, one wonders how world opinion would react if complaints from German far-right groups led to the destruction of that country’s monuments to its forced labourers. The removal of the Gunma memorial, if it goes ahead, will not change the facts of history nor will it make the world forget those facts.

The Japanese authorities, rather than trying to undo the decades of good work that has been done by their own citizens to build bridges to Asian neighbours, should be celebrating and supporting that work. Japan’s rich tradition of grassroots reconciliation action has generated a wealth of networks and knowhow that political leaders could use and learn from. The Gunma memorial and others like it should be preserved and embraced as small but precious monuments, not just to the victims of imperial violence and war but also to the goodwill of the many Japanese citizens who long for regional peace, cooperation and understanding.

Tessa Morris-Suzuki is an ARC Laureate Fellow based at the School of Culture, History and Language, at the College of Asia and the Pacific, The Australian National University.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘A Japan that can say ‘yes’‘.

Categories: Forum

Abbott’s awkward APEC moment

East Asia Forum - Tue, 11/18/2014 - 16:00

Author: James Laurenceson, ACRI

Forget shirt-fronting Russian President Vladimir Putin. Australian Prime Minister Tony Abbott’s most challenging task in the summit season was breaking an uncomfortable silence with Chinese president Xi Jinping. And he had to do it twice: first at the APEC meeting in Beijing and again at the G20 in Brisbane.

After vigorous lobbying by the US and Japan, Australia’s involvement in the China-led Asia Infrastructure Investment Bank was scuttled by the National Security Committee of federal cabinet on strategic grounds.

This does clarify the matter because trying to make sense of rejecting the proposal on the basis of economic reasoning is nigh on impossible. In 2011 the Asian Development Bank estimated Asia required US$750 billion each year through to 2020 to finance infrastructure needs. In 2012 the amount the ADB lent for infrastructure was just US$7.5 billion. It is no surprise that among the government ministers it was Treasurer Joe Hockey and Trade Minister Andrew Robb who were keen on Australia joining the AIIB.

The decision to rebuff China’s invitation is awkward to say the least. Australia made reducing barriers to infrastructure investment a focal point of the G20 agenda. There is also the small matter of the memorandum of understanding the Australian and Chinese governments signed in 2012 on enhancing cooperation in infrastructure construction.

What then is the strategic test the AIIB failed?

The reason Abbott has repeated is the AIIB is a unilateral institution dominated by just one country. This means its lending decisions might be used by China to peddle its own interests. What Australia wants to join is an AIIB committed to being a multilateral institution along the lines of the ADB or the World Bank.

The AIIB is dominated by China. The 21 founding member countries agree the basic parameter determining the capital structure of the new bank will be relative GDP. Taken at face value, this would give China a 67.1 per cent shareholding, with the next in line being India at 13.3 per cent.

Of course the complaint the AIIB is a unilateral institution relies on painfully circular logic. If the US, Japan, Korea and Australia refuse to join, then any hopes of the AIIB becoming a multilateral institution are neutered. If these four countries were on board, China’s share would immediately fall to 24.5 per cent.

For its part, China not only invited Australia to participate but also offered the country a senior role in its running. China’s finance minister Lou Jiwei has made it clear he expects China’s shareholding will be diluted as other countries come on board.

It is also not hard to guess how China would take to being told that the World Bank and ADB are models of multilateralism. In 2010, after years of trying, the World Bank agreed to raise China’s voting share from 2.8 per cent to 4.2 per cent. This still left it trailing Japan on 6.8 per cent and the US on 15.8 per cent. Yet China’s GDP is already double that of Japan and its population is more than ten times larger.

Abbott’s argument that Australia should stay away from the AIIB because China may use it to advance its own nefarious purposes falls short on several counts.

China is already more than capable of pushing its own interests through existing institutions such as the China Development Bank. The idea it would sponsor a new institution and then invite countries such as Australia to become partners in crime fails any test of common sense.

Then there is the point made by the former Australian ambassador to China, Geoff Raby. That is, if transparency in lending decisions is a genuine concern, the most effective way of dealing with it is from the inside. Clearly this was the view taken by Singapore, a country that routinely ranks higher than Australia on international surveys of transparency and governance.

AIIB members all have very different broader strategic interests. Vietnam and the Philippines are engaged in heated territorial disputes with China in the South China Sea. Yet this did not stop them uniting for the common goal of improving regional infrastructure.

The only strategic end being served by not joining the AIIB is Australia supporting the US and Japan in their attempt to preserve the status quo in the Asia Pacific. The problem is the status quo ended in 1979 when China began its reintegration into the global economy.

James Laurenceson is Deputy Director of the Australia China Relations Institute (ACRI) at the University of Technology, Sydney.

This article was first published here on The Conversation.

Categories: Forum

Can Japan’s National Security Strategy outlive Abe?

East Asia Forum - Tue, 11/18/2014 - 04:00

Author: Yuki Tatsumi, Stimson Center

On 17 December 2013, Prime Minister Shinzo Abe issued Japan’s first National Security Strategy (NSS). The document declares that Japan will make a more ‘proactive contribution to peace’ based on the principle of international cooperation. It also outlines three basic goals for Japan’s national security — ensuring the nation’s territorial sovereignty, improving the security environment in the Asia Pacific region by cooperating with the United States and other regional partners, and active participation in global efforts to maintain international order. While all these goals are admirable, the real question is whether the policy priorities defined by Abe can outlive his term.

During his visit to Washington DC in February 2013, Abe said he believed that Japan should remain a ‘first-class nation’. That is, it should belong to a group of nations that shape international rules and norms, and contribute to the stability of the global security environment. In a sense, the NSS is a document that outlines Abe’s perception of what Japan should do to join this group. The quick ascension of China — which has been emboldening Beijing for the last few years — no doubt influences Abe’s views. He sees Japan’s ‘proactive contribution to peace’ as critical to countering the rise of China.

The Japanese prime minister’s commitment to the principles identified in the NSS predates its release. Abe has spearheaded important changes in Japanese diplomacy since his cabinet was inaugurated in December 2012. So far he has focused his efforts on strengthening bilateral security cooperation and promoting respect for international norms.

Abe has sought to deepen bilateral security cooperation not only with the United States but also fellow US allies and other key security partners. For example in 2007, during Abe’s first term as prime minister, he paved the way for deeper Japan–Australia bilateral security links by signing the Joint Declaration on Security Cooperation. Since December 2012, Japan–Australia security relations have reached a new level of closeness, with the Tokyo ‘two-plus-two’ meeting (that is, a bilateral ministerial meeting that includes both foreign and defence ministers) in June 2014 followed by Abe’s visit to Australia on 8–9 July 2014.

Abe has also demonstrated a clear desire to forge a closer security relationship with India. Although Japan moved to forge a closer relationship with India in 2000, Tokyo’s diplomatic outreach to India also accelerated between 2006–07 when Abe was the prime minister the first time. Strengthening of Japan-India relations have enjoyed bipartisan support since then, culminating in the signing of Japan–India Economic Partnership Agreement (EPA) in February 2011. Similar to Japan–Australia relations, Abe clearly intends to pursue qualitative enhancement in this bilateral relations. In 2013, Emperor Akihito and Empress Michiko visited India as state guests in 2013 (Emperor Akihito returned to India for the first time in 53 years), which carries considerable diplomatic significance. About eight weeks following their visit, Abe himself visited New Delhi in January 2014, when he signed the Joint Declaration for Strategic and Global Partnership.

Southeast Asia and Europe are also included in the diplomatic foray — two regions in which Japan has had enduring foreign policy interests but where it has been unsuccessful in establishing concrete policy initiatives. In regards to Southeast Asia, Abe has become the first Japanese prime minister to have visited all 10 ASEAN member states. He also was the first Japanese prime minister to be invited to deliver the keynote speech at the annual Shangri-La Dialogue in Singapore in May 2014. Among ASEAN members, Abe has placed particular emphasis on reaching out to the Philippines, Vietnam and Myanmar — countries that share Japan’s concern about China’s increasingly assertive stance on territorial disputes.

In Europe, Abe participated in the North Atlantic Council meeting and NATO meeting in Brussels on 6 May 2014 to articulate why Japan and Europe are ‘natural partners’. Leveraging the efforts to institutionalise closer ties between Japan and NATO, including the 2010 agreement on securing classified information and related material, Japan under Abe’s watch convened joint research on humanitarian assistance and disaster relief with NATO. Furthermore, Abe and NATO Secretary General Anders Fogh Rasmussen signed Individual Partnership and Cooperation Program during his visit to Brussels. Japan has also aggressively pursued security dialogue with NATO member states on bilateral basis. For example, it held its first ‘two-plus-two’ meeting with France in January 2014. A Japan–UK ‘two-plus-two’ meeting is also in the works for later this year.

Also high on Abe’s agenda is promoting respect for international norms. Abe has emphasised the importance of an open and free global commons in the sea, air, cyberspace and space. In his first foreign policy speech in January 2013, he discussed the importance of a free and open maritime domain — a consistent theme in most of his major foreign policy speeches, including his keynote address at this year’s Shangri-La Dialogue. From Washington to Singapore, to Brussels, to Canberra, the central focus of Abe’s speeches has been the preservation of free and open seas, and the necessity of upholding international norms such as freedom of navigation.

Abe is also seeking to revamp Japan’s foreign and security policy toolkit. This includes institutional adjustments such as establishing the National Security Council (in November 2013) and legal adjustments such as enacting laws to protect classified information and the recent controversial decision to alter Japanese government’s position on the self-imposed complete prohibition on exercising the right of collective self-defence. Furthermore, his efforts include revising past policies, such as the release of the National Defense Program Guidelines in December 2013 and the recalibration of Japan’s arms export controls in April 2014. In addition, the Official Development Assistance Guidelines are to be further revised by the end of the year to create greater room for Japan to provide foreign assistance to help aid recipients to boost their security capacity.

These changes, if implemented fully and consistently by the governments that succeed Abe, will go a long way to putting Japan in a position where it can help to shape the global and regional security environment. It will allow Japan to have robust partnerships with countries other than the United States (Tokyo’s only treaty ally) while continuing to anchor Japan’s foreign and security policy to strong ties between Tokyo and Washington.

Abe’s efforts have already borne fruit, mainly in broadening the potential for Japan’s cooperation on defence equipment with US allies worldwide. Japan’s relations with the UK and Australia are most notable in this regard. On 4 July 2013 Japan signed an agreement to jointly develop defence equipment with the UK as well as an agreement to protect classified information. This institutionalised the security relations between Japan and UK based on the defence co-operation memorandum of understanding, which was signed in 2012. Japan and Australia have signed an agreement on joint research in submarine technologies. In Southeast Asia, Japan is already working with Indonesia and the Philippines to transfer Japanese coast guard equipment to help shore up their coast guard capacities.

But momentum is critical to build on these initial successes. As these agreements proceed to the implementation phase, it will be easy for the process to be bogged down by interagency competition as well as domestic resistance. The ultimate success of Japan’s multifaceted engagement outlined in the NSS depends on whether Japanese leaders, including Abe himself, can continue to exercise strong leadership.

The policy principles that are laid out in the NSS, while effective, are designed for Japan’s peacetime activities. How Japan can expand its participation in activities in times of crisis or post-conflict — whether as a part of peacekeeping forces that are organised under the UN or multinational forces that may or may not have UN mandates — still has not been thought through. While there has been an ongoing debate inside Japan over the right to collective self-defence, discussion about its participation in regional and global collective security frameworks has been absent. This suggests that Japan may still be unable to act promptly in times of crisis.

Japan’s strained relationship with South Korea also continues to handicap its efforts to expand cooperation with its fellow US allies. Both Tokyo and Seoul share responsibility in allowing the historical animosity to severely limit areas of practical policy cooperation. Without reconciliation with Seoul, another key US ally in Northeast Asia, Japan’s ability to play a robust and visible role in regional and global security issues will continue to be constrained.

Finally, the fact that the current NSS strongly reflects Prime Minister Abe’s own policy outlook may work against the longevity of the document. In principle, the NSS replaced the 1953 Basic Principles of National Defense and is expected to continue to define Japan’s national security policy priorities even after Abe departs. But, because it is very clear that the document reflects Abe’s own foreign and security policy views, it is just as likely that Abe’s successor will decide to revise the NSS to communicate his or her own policy preferences. Whether the policy of ‘proactive contribution to peace’ will have an enduring impact on Japan’s core foreign and security policy principles after Abe remains to be seen.

Yuki Tatsumi is Senior Associate of the East Asia program at the Henry L. Stimson Center, Washington DC. She has worked as the special assistant for political affairs at the Embassy of Japan in Washington.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘A Japan that can say ‘yes’‘.

Categories: Forum

Australia and China after their FTA

East Asia Forum - Mon, 11/17/2014 - 16:00

Author: Peter Drysdale, East Asia Forum

The past week has seen big breakthroughs in Asia Pacific economic diplomacy. At the APEC summit, Xi Jinping and Shinzo Abe broke the diplomatic ice in the China–Japan relationship. The United States and China paved the way towards extending the successful International Technology Agreement through the WTO. They also did a game-changing deal that will entrench deep cuts to carbon emissions through to 2025–30. China brought trans-regional (as opposed to Eastern and Western Pacific) integration back to centre stage in APEC’s quest for open regionalism. And in Brisbane, the G20 summit has crafted a global recovery strategy around broad-based cooperation on productivity-enhancing reforms and infrastructure investment, re-focused on the WTO and brought climate change back into play.

At the edges of the APEC meeting, China also moved to conclude free trade deals with South Korea and Australia, for both of which China is already the largest trading partner by far.

The conclusion of the Australia–China free trade agreement during President Xi Jinping’s state visit to Australia this week represents a major step forward in the bilateral relationship. The agreement will serve to deepen integration between the two economies, with substantial efficiency-enhancing liberalisation of trade, services and investment flows. It could also provide a pillar on which to anchor a much broader economic and political relationship that recognises the countries’ common interests in regional and global affairs.

Australia’s Trade Minister Andrew Robb had put priority on wrapping up the free trade agreement with China for a number of reasons. It was the last of the three big deals outstanding when the Coalition government came to office — settling with China after doing deals with South Korea and Japan delivered the trifecta. It sorted out anomalies in our huge trade relationship with China that were a hang-over from China’s deals with ASEAN, New Zealand and Chile, Australia’s competitors in important Chinese agricultural commodity markets. In this sense the new agreement serves to correct the discrimination that had crept into our dealings with China because of the preferential deals that others had secured. It also provided opportunity to address the tangle that both the present and former Australian governments had got into over Chinese investment in Australia, and build a more confident and beneficial investment relationship — though there are still issues about SOEs to be sorted out on China’s place in Australia’s foreign investment regime.

The agreement is a significant outcome from President Xi’s visit to Australia and the Australian government’s commitment to get the deal done. That it is being cast as a ‘living’ agreement, one that will incorporate review and extension as the commercial relationship between the two countries continues to evolve, though it signals that all issues haven’t been resolved at the first step, does not qualify the achievement.

Yet, there are many elements in the rapidly evolving bilateral economic relationship between the two countries that cannot readily be enfolded in a traditional free trade agreement of this kind and go well beyond its province, however open-ended its negotiation over time.

Indeed, while the agreement improves market access and commercial treatment at the margins for both parties, the real foundations of China’s economic partnership with Australia and its partners around the world, including the United States and Japan with neither of whom it has such a preferential bilateral trade agreement, or ASEAN and South Korea with whom it now does, are multilateral and global in character.

How are we to judge this achievement in economic diplomacy alongside the uncertainties that persist in Australia’s broader dealings with China? Australia’s recent demurral from signing on to the development of the China-instigated Asian Infrastructure Investment Bank left many in the region wondering about both the rigour and the independence of Australia’s assessment of its national strategic interests, and the US President needing to re-assert the consistency in his country’s rhetoric on the US–China relationship. These can be accepted as momentary fumbles and open — as Australian Prime Minister Tony Abbott has said — to further consideration, but they raise questions about the big strategic setting in which this latest step forward will have impact big or small.

As leading Chinese analyst, He Fan, says in this week’s lead essay, Australia is in fact well placed as an important player in the surge of strategic diplomacy around China’s new place in the world. The question is how can Australia leverage more out of its close economic relations with China?

The world trading system is undergoing a complex and difficult transition. What worries China most in this process is the threat of a backlash against globalisation in our region. Australia, with its strong record of support for trade liberalisation and open regionalism in Asia, can help guide China and other countries through these questions ‘as Asia’s dependable voice’ on the trade regime, in negotiation of a Regional Comprehensive Economic Partnership and in the WTO. And, following the most recent example of Indonesia, joining the AIIB still provides Australia with an opportunity to influence the direction and operation of that new organisation.

Australia also has an important role to play with China in the global theatre. When China assumes the presidency of the G20, Australia is strongly placed to help it get the right outcome.

Categories: Forum

US–China agreement presages a change in the air

East Asia Forum - Mon, 11/17/2014 - 04:00

Author: Frank Jotzo, ANU

The joint Chinese–American announcement of emissions targets brings the world a big step closer to meaningful post-2020 action on climate change. Barack Obama in his Brisbane speech made it clear where the two superpowers see things going: ‘If China and the United States can agree on this, then the world can agree on this’.

The situation leading into the 2015 Paris climate conference is fundamentally different from Copenhagen in 2009. Then, confusion and suspicion reigned, and while China made a significant unilateral emissions pledge, it upheld the age-old division over climate action between developing and developed countries.

Now, there is a deal between the two major emitters — and as I foreshadowed in October, a China–US deal this year had been on the cards for some time. Other countries can use it as a yardstick, and it will instill confidence.

There are two crucial factors that explain China’s engagement on climate change.

The first is China’s willingness to take a leadership role on matters of global concern. Beijing judges that climate change and climate action will be important strategic and economic issues, and so it wants to lead, not follow.

The second is a new view of the opportunities that climate change action can bring. President Xi Jinping has decried the old model of development as ‘unbalanced, uncoordinated and unsustainable’, and called for emphasis on the quality rather than just the speed of economic growth.

Action to cut emissions is in tune with those objectives. It is not only about limiting future climate change impacts, which could hit China hard.

Cutting coal use improves air quality and thereby quality and length of life. Reducing reliance on fossil fuels improves energy security. Improving energy efficiency can yield economy-wide productivity gains. Investing in innovation can yield business leadership in new energy technologies. China also seeks to shift in economic structure towards higher value manufacturing and services to sustain growth beyond the middle income phase. This will reduce the energy intensity of economic growth.

‘China will lead the world to by providing a blueprint for a new climate economy’, concluded a Tsinghua University report released last week by the New Climate Economy project. Obama called out the ‘false choice’ between development and cutting pollution, and noted that developing countries can ‘leap-frog some of the dirty industries that powered our development’.

The new Chinese and US emissions pledges are meaningful even though they fall short of trajectories that would lead to an even chance of limiting long-term global warming to two degrees.

China committed to stop the rise in its CO2 emissions by 2030, and to increase the share of ‘clean’ energy to 20 per cent of its overall energy supply. This requires expanding the policy effort already underway in China, including through emissions trading and energy market reform.

Many observers consider that a CO2 peak at 2025 or earlier is possible. Reaching an emissions peak by 2030 implies a much earlier peak in coal use, as the consumption of oil and natural gas will keep growing for some time.

China is likely to translate the commitment made last week into a series of more concrete pledges, probably including a date for ‘peak coal use’, as well as a pledge for emissions or emissions intensity after 2020. Previous experience suggests that the Chinese government is serious about keeping its commitments.

The United States committed to a reduction in national greenhouse gas emissions by 26 to 28 per cent at 2025, relative to 2005. This implies roughly twice the rate of annual reductions in the first half of the 2020s, compared to the existing target of a 17 per cent reduction from 2005 to 2020. US emissions reached a plateau in the first half of the 2000s and started falling in 2008, helped by the rise of natural gas. The US also pledged three billion dollars to the UN Green Fund for climate action in developing countries.

The Obama administration is pursuing emissions reductions through regulatory measures, while some states have already implemented market-based mechanisms to reduce emissions.

Despite the obvious potential for a turnaround from Obama’s legacy-building climate policy, especially if there is a Republican administration post-2016, it stands to reason that a future administration would find it difficult to break away from the accord established with China, or indeed to halt the US domestic trend towards a lower-carbon energy system.

Joint leadership by China and America creates pressure for other countries to make meaningful climate commitments, and policies to match. Being out of line would come at a cost.

It will also create a measure of confidence for other countries that policies to cut back on emissions will not damage their economies. Broader action means there is less fear of disadvantage to domestic producers. And the new thinking on economic growth opportunities may catch on. If China does it, many developing countries will try to emulate it.

Agreement among the big two also smoothes the road to a new global climate agreement, to be worked out over the course of 2015 and to be sealed at the December 2015 Paris UN climate conference.

Meanwhile, governments of some fossil fuel exporters like Australia, Canada and Saudi Arabia seem to focus on a narrowly defined self-interest in protecting established high-carbon industries.

The Australian government reportedly fought to downplay climate change in the G20 deliberations and communiqué. Prime Minister Tony Abbott on several recent occasions made statements in support of coal above all other sources of energy. The US President’s reminder in his speech that Australia has much to lose from climate change seems to have had little immediate effect on Australia’s stance.

But with climate change now firmly on the international policy agenda once more, it will be difficult for a small number of countries in an Axis of Carbon to sustain a fundamental opposition against climate policy.

The China-US pact will help focus domestic debate in Australia and elsewhere on the benefits that a low carbon future can bring, and the need to get the transition underway rather than perpetuating old industrial structures.

At a minimum, it will drive governments to make climate commitments sufficient to avoid international embarrassment and the risk of alienating allies and key trading partners.

Frank Jotzo is an ANU Public Policy Fellow and director of the Centre for Climate Economics and Policy at the Crawford School of Public Policy. He co-ordinates a collaborative research program between Chinese and Australian institutions on climate policy.

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